Mumbai Tribunal rules charterer includes slot charter arrangement for availing treaty benefit under Article 8 of India Malaysia DTAA

Transcription

1 22 July 2014 EY Tax Alert Mumbai Tribunal rules charterer includes slot charter arrangement for availing treaty benefit under Article 8 of India Malaysia DTAA Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (Tribunal) in the case of M/s MISC Berhad [1] (Taxpayer) on the issue of whether the entire profits on freight income, which also comprised slot charter arrangement with third party feeder vessels, is covered under Article 8 of the India Malaysia Double Taxation Avoidance Agreement (Malaysia DTAA [2] ) as profits from operation of ships. Based on the facts, the Tribunal held that there is complete linkage of the voyage between the Indian port to the hub port through a feeder vessel and from the hub port to the final destination port through the mother vessel owned/leased by the Taxpayer and, therefore, the entire profits derived from the transportation of goods carried on by the Taxpayer are to be treated as profits from operation of ships eligible for the benefit of Article 8. [1] TS-418-ITAT-2014(Mum) [2] This decision is based on the language contained in the erstwhile 2001 India-Malaysia DTAA. The new 2012 Malaysia DTAA has comparable language and should, therefore, apply to the present Malaysia DTAA as well.

2 Facts Tax Authority s contentions The Taxpayer is a tax resident of Malaysia. The Taxpayer is engaged in the business of shipping in international traffic. The Taxpayer operates ships that are either owned by it or taken on lease. Insofar as the shipping business from India is concerned, the Taxpayer books cargo from shippers/customers in India up to the final destination port, with all risks and responsibility. The bill of lading is issued for the entire voyage. The Taxpayer, under a slot charter arrangement, arranges for transport of cargo from the Indian port to the hub port, using the service of feeder vessels which are owned by a third party. From the hub port, the Taxpayer s containers are transhipped on the mother vessel, which are owned/leased by the Taxpayer, and from the hub port it is carried to the final destination port. The Tax Authority noted that the Taxpayer had claimed the benefit of Article 8 of the Malaysia DTAA on the entire freight income which comprised two components: (i) Transportation of cargo in international traffic by operating ships owned or pooled by the Taxpayer. (ii) Carriage of goods by feeder vessels belonging to another shipping line wherein the Taxpayer did not have any pool arrangements. While the Tax Authority allowed the benefit of Article 8 on the first component i.e., transportation of cargo in international traffic by operating ships owned or pooled by the Taxpayer, it denied the benefit of Article 8 on freight income on the second component i.e., carriage of goods by feeder vessels which were operated by a third party. The Tax Authority contended that Article 8 of the Malaysia DTAA applies only when the taxpayer is the owner, lessee or charterer of a ship.

3 The Tax Authority contended that the wordings of Article 8 in the Malaysia DTAA are different from the shipping article of the OECD Model Convention (OECD MC). The provisions of the Malaysia DTAA necessarily require that transportation of goods is carried on by the owners or lessees or charterers of ships. Such language is not present in the OECD MC. This shows that at the time of signing the Malaysia DTAA, the contracting parties were well aware of the restrictive scope of Article 8 of the Malaysia DTAA. Therefore, wide interpretation given in the OECD commentary, that includes ancillary activities connected with shipping, cannot be extended to the present case. The Taxpayer relied on the observations of the Bombay High Court decision in the case of Balaji Shipping UK Ltd [3]. which explained the expression charterer and argued that income earned by the taxpayer under such an arrangement also needs to be included in the expression operation of ships in international traffic. The Bombay HC, in this decision, noted that a slot charter and a voyage charter of a part of a ship are, in a sense, charterers of a space in a ship. On this issue, the First Appellate Authority upheld the position of the Tax Authority. Aggrieved, the Taxpayer appealed to the Tribunal. Furthermore, the word charterer used in Article 8 of the Malaysia DTAA has to be seen from the context of the meaning understood for the words owner and lessee i.e., a person who has substantial control over the ship. Chartering of some space or a slot charter arrangement cannot be equated with chartering of a complete ship and, merely by issuing a bill of lading for the entire voyage, the Taxpayer cannot be said to be involved in operation of ships since the Taxpayer had not taken any risks or responsibility, either financial or for operation of ships. Taxpayer s contentions The Taxpayer submitted that the entire voyage was inextricably linked and cannot be segregated. The Taxpayer had, in fact, issued a single bill for the entire voyage. Tribunal s ruling The Tribunal observed that the activity of operation of ships carried on by a person cannot be understood merely as a person who operates the ships. It has to be understood in the broader sense of carrying out shipping activity. Carrying out of shipping activity could be as an owner or as a lessee or as a charterer of a ship. Where the word owner has to be inferred as a person who owns a ship and the word lessee as one who owns a ship for a given lease period, the word charterer has to be understood as a person who charters/hires a ship for a voyage. Further relying on several definitions, the Tribunal held that even hiring part of a space in a vessel for a particular journey is also considered as charterer. The Tribunal also relied on certain observations on charterer and charter from the decision of Balaji Shipping UK Ltd., which was in the context of India UK DTAA (UK DTAA) provisions based on the OECD MC. [3] Refer EY Tax Alert Bombay HC rules slot hire arrangements entitled to DTAA benefits dated 24 August 2012

4 Furthermore, the Tribunal observed that: Operation of a ship can be done as a charterer who does not mean to own or control the ship, either as an owner or as a lessee. Charterer is a hirer of a ship under an agreement to acquire a right to use a vessel for transportation of goods on a determined voyage, either the whole/part of the ship in a charter party agreement. The word charterer includes a voyage charter of part of a ship/slot, since it is an arrangement to hire space in a ship owned and leased by other persons. The voyage between the Indian port to the hub port through feeder vessel and from the hub port to the final destination port through mother vessel owned/leased by the Taxpayer are inextricably linked and there is complete linkage of the voyage. Therefore, the entire profits derived from the transportation of goods carried on by the Taxpayer is to be treated as profits from operation of ships and, therefore, the benefit of Article 8 cannot be denied to the Taxpayer on the part of the freight from voyage by the feeder vessels. Comments Also, as referred in Chapter XIIG of the Income Tax Act, the concept charterer of ships includes slot charter arrangement. The facility of slot hire arrangement is not merely an auxiliary or incidental activity to the operation of ships, but is inextricably linked to such activity. In the present case, the Taxpayer was able to establish linkage of the voyage along with documentary proof i.e., the bill of lading issued for the entire voyage. This was also accepted by the Tax Authority. The risk under the charter party agreement or arrangement is upon the owner of the ship who generally assumes an operational risk for transporting cargo of a person who has hired the ship. The risk of the Taxpayer is towards its customers with whom it has agreed to transport the cargo. In the present case, the Tribunal held that transportation of cargo in the container belonging to the Taxpayer from the Indian port i.e., the port of booking to the hub port through feeder vessel by way of space charter/slot charter arrangement falls within the ambit of the word charterer. This component cannot be segregated form the scope of operation of ships as defined in Article 8 of the Malaysia DTAA. Foreign shipping companies which operate through slot hire arrangements, even though for part of the voyage, have often faced challenges in obtaining the benefit of Article 8 (Shipping) of a DTAA on the issue of whether income earned from such arrangements qualifies as profits from operation of ship in international traffic. In this ruling, the Tribunal has relied on the observations of the Bombay HC decision of Balaji Shipping UK Ltd. on charterer and has clarified that, even though the language of the Malaysia DTAA is at variance with the OECD MC, the expression charterer is intended to include slot charter arrangement and that such an arrangement is inextricably linked to the business of shipping. This decision clarifies that a taxpayer operating under a slot charter arrangement for part of the voyage and which can establish a linkage to the entire voyage should be eligible for benefit under Article 8 (Shipping) of a DTAA on the entire profits of the voyage.

5 Our offices Ahmedabad 2nd floor, Shivalik Ishaan Near. C.N Vidhyalaya Ambawadi, Ahmedabad Tel: Fax: Bengaluru 6th, 12th & 13th floor U B City Canberra Block No.24, Vittal Mallya Road Bengaluru Tel: Fax: Prestige Emerald, No. 4, 1st Floor, Madras Bank Road, Lavelle Road Junction, Bangalore Chandigarh 1st Floor SCO: Sectr 9-C, Madhya Marg Chandigarh Tel: Fax: Chennai Tidel Park, 6th & 7th Floor A Block (Module 601, ) No.4, Rajiv Gandhi Salai Taramani Chennai Tel: Fax: Hyderabad Oval Office 18, ilabs Centre, Hitech City, Madhapur, Hyderabad Tel: Fax: Kochi 9th Floor ABAD Nucleus NH-49, Maradu PO, Kochi Tel: Fax: Mumbai 14th Floor, The Ruby 29 Senapati Bapat Marg Dadar (west) Mumbai Tel Fax th Floor Block B-2, Nirlon Knowledge Park Off. Western Express Highway Goregaon (E) Mumbai Tel: Fax: NCR Golf View Corporate Tower B Near DLF Golf Course, Sector 42 Gurgaon Tel: Fax: th floor, HT House Kasturba Gandhi Marg New Delhi Tel: Fax: th & 5th Floor, Plot No 2B, Tower 2, Sector 126, Noida Gautam Budh Nagar, U.P. India Tel: Fax: Pune C 401, 4th floor Panchshil Tech Park Yerwada (Near Don Bosco School) Pune Tel: Fax: Ernst & Young LLP EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata Ernst & Young LLP. Published in India. All Rights Reserved. ED None This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Kolkata 22, Camac Street 3rd Floor, Block C Kolkata Tel: Fax: EY refers to global organization, and/or one or more of the independent member firms of Ernst & Young Global Limited Join India Tax Insights from EY on